401(k) Nondiscrimination Testing ADP Failure

Our company employees union employees from numerous trade unions.  Each trade offer its own retirement benefits to its members; many of which consist of 401(k) plans administered by the various union trusts.  As an incentive to work for our company, we have offered an additional 401(k) plan to these union employees with a 3% match.  Historically, for nondiscrimination testing, we have only counted employees who participated in our plan.  We did not count eligible employees who did not participate in our plan because they had 401(k) plans offered by their individual unions that they were participating in.  In other words, rather than taking deferrals from pay and adding to their company 401(k) accounts, we were making contributions to their union plans out of our payroll.

This year, we were informed by our TPA that we should have been counting all "eligible" union employees, not just the employees who participated in the plan.   When these additional "eligible" employees were added to the pool of employees tested, we failed the ADP test due primarily to all of the non-participants.

We fixed the problem this year and issued refunds to the impacted highly compensated employees.  However, because we performed the nondiscrimination testing using incomplete data for many years, we are facing the rather daunting task of remedying past failures.  We have been advised that the remedy involves making refunds to highly compensated employees for past failures and making one-to-one contributions to the non highly compensated pool of plan participants.  Besides the financial burden this poses, it leads to several other problems such as deceased participants and participants who retired and pulled their money from the plan.

Has anyone had a similar experience and what recommendations do you have for dealing with the issue?  Is anyone aware of a rule or exception that would justify the way we were counting employees for discrimination testing?

Your comments and suggestions will be much appreciated.

I believe you are supposed to run two test in this case. One that covers just non-union employees and one that covers only union employees. I'm pretty sure the union and non-union employees must be disaggregated  for ADP and ACP testing. I believe that the union portion gets a free pass on ACP but not ADP. Though there might be rules that allow you to aggregate the two populations.

However it's been some time since I looked at the rules for plans covering both Union and Non-Union because employees we don't currently administer any like this.

Thanks for the quick response, Lou.  Our non-union employees are covered under a completely separate 401(k) plan and a separate nondiscrimination testing is performed on that plan.

Can someone be covered under a union 410(k) and an ER-sponsored 401(k) plan at the same time?

The answer we have been told is yes.  While making deferrals under our union plan, they do not make deferrals under the plan offered by their union.  So, while technically eligible under two plans, they are only participating in one plan at any given time.

So I'm guessing they should be counted in both tests.

I think I misunderstood the nature of the original question. But as a followup is the ER plan that covers the union employees considered covered under a collective bargaining agreement?

If yes can you take advantage of IRS regs that allow you to aggregate all your union plans and do a single test? I think the applicable reg is IRC 1.401(k)-1(g)(11)(ii)(B).

But I don't know if this would make your situation better or worse.

If I understand correctly, the question deals with a plan that only covers collectively bargained employees. I'm assuming this plan is allowed by the CBA, because I've been told in the past that you would have labor law problems if it isn't. 

A plan (or the disaggregated portion of a plan) that covers only collectively bargained employees automatically satisfies 410(b).

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1.410(b)-2(b)(7) Plans benefiting collectively bargained employees. A plan that benefits solely collectively bargained employees for a plan year satisfies this paragraph (b)(7) for the plan year. If a plan (within the meaning of §1.410(b)-7(b)) benefits both collectively bargained employees and noncollectively bargained employees for a plan year, §1.410(b)-7(c)(4) provides that the portion of the plan that benefits collectively bargained employees is treated as a separate plan from the portion of the plan that benefits noncollectively bargained employees. Thus, the mandatorily disaggregated portion of the plan that benefits the collectively bargained employees automatically satisfies this paragraph (b)(7) for the plan year and hence section 410(b). See §1.410(b)-9 for the definitions of collectively bargained employee and noncollectively bargained employee.

A collectively bargained plan that automatically satisfies 410(b) is deemed to pass 401(a)(4), so no ADP test is needed.  Note: For a plan that does not automatically satisfy 401(a)(4), the ADP test is how you show a 401(k) satisfies 401(a)(4),  see 1.401(k)-1(a)(4)(iv).

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1.401(k)-1(a)(5)(iv)(B) Application of section 401(a)(4) to certain plans. The amount of employer contributions under a nonqualified cash or deferred arrangement is treated as satisfying section 401(a)(4) if the arrangement is part of a collectively bargained plan that automatically satisfies the requirements of section 410(b). See §§1.401(a)(4)-(c)(5) and 1.410(b)-2(b)(7). ...

There is a similar rule for employee contributions and match.

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1.401(m)-1(b)(2) Automatic satisfaction by certain plans. Notwithstanding paragraph (b)(1) of this section, the requirements of this section are treated as satisfied with respect to employee contributions and matching contributions under a collectively bargained plan (or the portion of a plan) that automatically satisfies section 410(b). See §§1.401(a)(4)-1(c)(5) and 1.410(b)-2(b)(7).

...

So, if I understand the situation correctly, the problem you have is that there were not supposed to be any ADP/ACP refunds this year because the plan automatically satisfied ADP/ACP. Those overpayments can be corrected under EPCRS. 

On ‎3‎/‎15‎/‎2019 at 2:37 PM, 401(k)Ben said:

The answer we have been told is yes.  While making deferrals under our union plan, they do not make deferrals under the plan offered by their union.  So, while technically eligible under two plans, they are only participating in one plan at any given time.

If the plan documents allow these employees to participate in both plans at the same time, this could be a problem, too.